Financialization – “a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
– Greta Krippner, University of Michigan (source Wikipedia)
If you want one word to describe the biggest threat to the American economy, “financialization” would be the prime candidate. This is a threat that has no ideology. The left tends to blame economic challenges on the excessive power of oligarchs. The libertarian right tends to blame economic challenges on excessive regulations emanating from oversized government. But financialization empowered the oligarchs. And financialization is the toxic remedy that has, for a time, enabled oversized government.
Krippner’s analysis of financialization goes beyond its obvious manifestations – the most obvious being the loophole that allows hedge fund managers to avoid paying ordinary income tax on the billions in bonuses they earn when they get lucky placing bets with other people’s money. An excellent in-depth article in Time Magazine published on May 12th, entitled “American Capitalism’s Great Crisis,” quotes Krippner’s deeper explanation of how financialization began:
“The changes were driven by the fact that in the 1970s, the growth that America had enjoyed following World War II began to slow. Rather than make tough decisions about how to bolster it, politicians decided to pass that responsibility to the financial markets. The Carter-era deregulation of interest rates—something that was, in an echo of today’s overlapping left-and right-wing populism, supported by an assortment of odd political bedfellows from Ralph Nader to Walter Wriston, then head of Citibank—opened the door to a spate of financial “innovations” and a shift in bank function from lending to trading. Reaganomics famously led to a number of other economic policies that favored Wall Street. Clinton-era deregulation, which seemed a path out of the economic doldrums of the late 1980s, continued the trend. Loose monetary policy from the Alan Greenspan era onward created an environment in which easy money papered over underlying problems in the economy, so much so that it is now chronically dependent on near-zero interest rates to keep from falling back into recession.”
Carter. Reagan. Clinton. It’s important to document the bipartisan emergence of financialization. It can’t be unwound, or even discussed accurately, simply by referring to conventional ideological schisms. The impact of financialization in America has been to enable private households and government agencies to spend more than they take in, and to make up the difference by borrowing more than they can ever hope to pay back. And through it all, for the past 40+ years, the financial sector has extended the credit, accumulating more power and profit every step of the way. Ideology and partisanship provided the justifications and the means, but they came from the right and the left.
Estimates vary as to how much corporate profit now accrues to the financial sector in the U.S., but range between 25% and 40%. By comparison, in Germany the financial sector earns about 6% of corporate profits. America’s overbuilt financial sector attracts the brightest college graduates. Math majors who might have gone into applied physics, engineering, chemistry, now migrate to Manhattan and work for the hedge funds.
Closer to home, here’s how financialization has harmed ordinary Americans:
- Created an incentive through low interest rates and tax law for people to borrow instead of save,
- Rendered housing and college tuition unaffordable, thanks to low interest rates inducing borrowers to bid up prices,
- Destroyed the ability of thrifty households to save, because only risky investments offer adequate returns,
- The emphasis on shareholder value above all else has depressed wages and driven jobs overseas,
- Attracted brilliant innovators to work for financial firms (which produce nothing) instead of actual industries that create jobs and national wealth.
There’s more – and this is the least discussed but perhaps the most significant consequence of financialization. It expands the public sector, and it helps public sector unions. Here’s how:
- Governments can expand beyond the capacity of their tax revenues by borrowing at low interest rates,
- Government unions can negotiate over-market pay and benefits, relying on borrowing to cover deficits,
- Government pension funds can make risky investments with the taxpayers backing them up,
- As financialization drives middle class citizens into poverty, the government expands its aid programs.
The connection between government unions and the financial oligarchs who currently run both political party establishments may be abstruse, but it isn’t trivial. They have a common interest in a financialized economy; a common interest in seeing what is now the biggest credit bubble – as a percent of GDP – in American history get even bigger. This is explicitly contrary to the interests of ordinary Americans. The awakening grassroots resistance to the financialization of America explains the rise of populism in 2016, and it’s just begun.
* * *
Ed Ring is the President of the California Policy Center.